Virginia Mayo/AP
European Council

Merkel rules out backdated ESM help for bailing out Europe’s banks

The German chancellor tells a news conference there “will not be any retroactive direct recapitalisation”. That’s us told.

Updated, 17:28

GERMAN CHANCELLOR Angela Merkel has firmly ruled out any prospect of the new permanent Eurozone bailout fund helping to recapitalise banks which have already received aid from their respective governments – possibly including Ireland’s.

Speaking to reporters at the conclusion of the two-day meeting of EU heads of government in Brussels, Merkel echoed comments from other leaders saying it would take time for a new permanent European banking supervisor to be set up.

This is seen as a precondition of the permanent bailout fund, the European Stability Mechanism (ESM), being able to directly recapitalise banks – a matter which has direct importance for Spain, which may find its banks needing aid before the new supervisory can be set up.

Asked about whether Spain would be able to get money back from the ESM if the supervisor wasn’t set up in time, Merkel flatly insisted: ”It will not be a retroactive direct capitalisation.”

The chancellor added: “If recapitalisation is possible, it will come for the future. If the banking supervision is in place, we no longer have any problems with the Spanish banks.

“At least, that is my hope,” she said.

Looming German election means hardline stance

Though the answer related directly to Spain – and can also be taken in the context of Merkel having to go before German voters next September – it bodes badly for Ireland, which was hoping to have the ESM give retrospective aid for Ireland’s banks.

Ireland’s hopes were that the arrangement in Spain, where the ESM will recapitalise banks directly instead of lending money to the government to do so itself, could be replicated retrospectively for Ireland.

Now, with Merkel even questioning whether such an arrangement can be used for Spain, the prospect that Ireland’s state aid could be replaced with ESM funding appears to have taken a significant dent.

In a statement the Irish government said it understood Merkel’s comments came in response to “a direct question about the recapitalisation of Spanish banks”, and that she had replied in that context.

Fine Gael MEP Seán Kelly said the focus of Ireland’s hopes had always been to sell its stake in the banks to the ESM, rather than recapitalising, which was now in the past and could not be revisited.

Merkel had welcomed the decision of EU leaders to set up the legal framework for a so-called ‘Single Supervisory Mechanism’, a new pan-European banking regulator, by January 2013 – but warned that it could take some time for the regulator to be set up.

The German leader said it should first be agreed that the ECB was not equipped to act as a reliable regulator itself, and then the appropriate staff would have to be recruited. “It’s not even on the horizon for the time being,” she said, referring to the regulator coming into effect.

Merkel had earlier told reporters that German was in favour of the creation of some sort of solidarity fund for Eurozone coutnries, but again appeared to pooh-pooh the idea of so-called “Eurobonds” – a bond issued jointly by all Eurozone nations rather than individual countries.

“I think that mutualisation of liabilities – as long as we have national budgets – is not the appropriate answer,” she said. “This is not something we would be able to support.”

Kenny welcomes summit as proof of intent

At a press conference taking place at the same time, Enda Kenny described the two-day summit as a positive one – saying the statement issued by participants affirmed the desire to “break the vicious circle between banks and sovereigns”.

“We have a clear timeframe now for the putting in place of a legal framework in which the operation and the mechanics for the recapitalisation of banks can take place,” Kenny said.

“You cannot do anything about this until you have a legal framework in place.”

Kenny added:

The credibility of the Eurozone Union and the Eurozone rests on the capacity and the willingness, and indeed the courage, of its leaders to flow through on the decisions that are made and to be seen to follow through.

That’s what leadership is all about – the different between the concept of an idea and the translation of that into reality.

Asked about the criteria under which ESM funds could be injected into banks, Kenny said this was now a matter for the Eurogroup, the meeting of 17 Eurozone finance ministers, who will now be asked to hammer out a deal on how the new banking regulator can work.

Opposition parties in Ireland slammed the government for its positivity on the outcome of the summit, with Sinn Féin describing Merkel’s comment as “a Judas kiss” while Fianna Fáil describing the comments as proof of how little progress had been made in seeking a deal for Ireland’s benefit.

Read: Here’s the exact transcript of Angela Merkel’s comments in Brussels

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